June 3, 2022

Daily Market Commentary

Canadian Headlines

  • Doug Ford cruised to a second victory as Ontario’s premier, cementing his control over Canada’s most populous province for the next four years after promising to steer the economy to a post-pandemic recovery with heavy spending on infrastructure. His Progressive Conservatives won a handy majority, leading or elected in 81 of 124 electoral districts as of 10:35 pm Toronto time. His party swept most of the seats in the suburbs around Toronto and in the southwestern and eastern regions of the province, which is home to about 15 million people. Ford, 57, ran under the slogan “Let’s Get It Done” with a platform that promised to spend billions on construction projects. While his rivals criticized his handling of Covid-19 and his spending cuts to social services, the former city councilor and brother of late Toronto Mayor Rob Ford stayed on message, touting his plans to build roads, highways and hospitals and winning support from key unions representing construction workers and plumbers.
  • Toronto home prices fell for the third straight month, as rising interest rates spur an abrupt reversal in a city recently at the heart of one of the world’s hottest housing markets. The average selling price for a home in Canada’s largest city fell 3.1% in May to C$1.18 million (about $939,000) on a seasonally-adjusted basis, according to data Friday from the Toronto Regional Real Estate Board. Toronto hasn’t seen three consecutive months of price declines since early 2019.  Prices have now declined nearly 9% from their February peak.  Until recently, Canada had some of the fastest home-price increases in the world, with Toronto and smaller communities in the province of Ontario leading the way as buyers took advantage of low rates and sought more space to work remotely. Now, as the central bank tries to rein in inflation that’s running at nearly 7%, borrowing costs are rising quickly.
  • West Fraser said it expects to buy back about 11.9 million shares at about $95/share in its substantial issuer bid. “West Fraser expects to take up and pay for approximately 11.898 million Shares at a price of approximately $95 per Share, representing an aggregate purchase price of approximately $1.130 billion”. West Fraser currently expects that all shareholders who made auction tenders and purchase price tenders will have 100% of their successfully tendered Shares purchased by West Fraser at the purchase price

World Headlines

  • European stocks were steady as investors assessed concerns including soaring inflation and slowing growth against cheaper equity valuations after a recent selloff. Trading volumes were thin as the UK market remained closed for a public holiday. The Stoxx Europe 600 Index was up 0.2% at 12:40 p.m. in Paris, with chemicals and consumer products leading the gains. The European stock benchmark is poised to end the week lower than where it started after a couple of declines midweek. Stocks have been volatile this year as hawkish central banks, rising costs for companies and the war in Ukraine fueled a selloff. The Stoxx Europe 600 is trading at about 12.6 times estimated earnings for the coming year, below its average of 14.5 for the past decade.
  • US index futures fell after a report that Tesla Inc. Chief Executive Officer Elon Musk said the electric carmaker needs to cut staff amid a gloomy economic outlook. Investors are also awaiting key US payrolls data that they will study for clues on the pace of Federal Reserve policy tightening. Tesla shares slid 4.8% in New York premarket trading. Contracts on the Nasdaq 100, where Musk’s company is among the largest index components, were 1% lower. S&P 500 futures dropped 0.6%. Investors remain on edge as some fear the pace of US monetary tightening could throw the world’s largest economy into a recession. Friday’s May labor report is likely to show the smallest gain in jobs since April 2021 alongside a down shift in average hourly earnings growth.
  • Asian stocks rose, poised for a third straight week of gains as investors awaited US non-farm payrolls for clues on the trajectory of interest rates. The MSCI Asia Pacific Index advanced as much as 0.7%, led by energy and material firms, with BHP Group and Reliance Industries among the biggest contributors. Gauges in Japan and Australia were the region’s best performers, while markets in China, Hong Kong and Taiwan were shut for a holiday. Investors are turning their attention to Friday’s data on non-farm payrolls following the release of weak private payrolls figures overnight. This comes as Federal Reserve Vice Chair Lael Brainard said expectations for half-percentage-point increases in interest rates this month and next were reasonable.
  • Oil headed for a sixth weekly advance after a keenly anticipated OPEC+ meeting delivered only a modest increase in output that failed to assuage concerns over a widening supply deficit. The producers cartel agreed to a hike that amounts to just 0.4% of global demand over July and August. There had been speculation the Saudis were preparing to pump significantly more as part of a reset of relations with the US, and there were even suggestions that Russia might be exempted from the alliance’s monthly supply agreements. That didn’t happen, with West Texas Intermediate closing up 1.4% after the decision and trading near $116 a barrel on Friday. A six-month long rally in the US benchmark — the longest such run in more than a decade — now looks set to continue. A report showing American crude stockpiles falling more than twice as much as expected last week at the start of the summer driving season highlighted the growing supply deficit
  • Gold headed for a third straight weekly advance amid mounting worries over a softening economy, ahead of a key US jobs report which could offer clues on the Federal Reserve’s tightening path. Bullion is trading near the highest level in more than three weeks as demand for haven assets rose on concerns that aggressive interest rate hikes could throw the world’s largest economy into a recession. Labor data due later Friday is likely to show the smallest gain in jobs since April 2021 alongside a downshift in average hourly earnings growth, according to Bloomberg Economics.  On Thursday, Goldman Sachs Group Inc. President John Waldron warned of tougher times ahead amid a string of shocks rattling the global economy. His words echoed JPMorgan Chase & Co. Chief Executive Jamie Dimon, who said investors should prepare for an economic “hurricane.”
  • Tesla Inc. Chief Executive Officer Elon Musk said the electric carmaker needs to cut staff by around 10%, noting he had a “super bad feeling” about the economy, according to an internal email seen by Reuters. The email, titled “pause all hiring worldwide,” was sent to Tesla executives on Thursday. The report comes at a tumultuous time for Musk and the carmaker he made an EV pioneer. Tesla’s stock has slumped 22% since the billionaire struck a shock deal to acquire Twitter Inc. that now appears to have stalled. Anxiety about the global economy and the impact of China’s Covid-19 lockdown in Shanghai, where Tesla has a factory, have also weighed on the company, which has weathered worldwide supply shortages for components like chips better than most.
  • OPEC+’s hotly anticipated output meeting on Thursday underwhelmed the market, with oil prices closing up after the decision. The alliance agreed to production hikes of 648,000 barrels a day for July and August, about 50% bigger than those seen in recent months. But there were doubts about the group’s ability to fully deliver the increases, given they will be spread across its members, many of whom have struggled to raise output. Oil’s just capped its sixth straight monthly gain — the longest such run in a decade — and the rally now looks set to continue as the supply deficit widens.
  • Allianz SE will take a hit of about 400 million euros ($430 million) to profit from the sale of a majority in its Russian operations, part of a retreat from the country in the wake of the war in Ukraine. Allianz, which is selling the stake to Interholding LLC, will own 49.9% in the combined company after the transaction, the Munich-based company said in a statement on Friday. The deal won’t impact it’s solvency capitalization and cash position. Allianz earlier this year stopped insuring new business and making new investments in Russia on behalf of its own investment portfolio following the country’s invasion of Ukraine.
  • President Joe Biden called for a ban on sales of assault weapons and high-capacity magazines, pleading with Congress to toughen gun laws following a spate of mass shootings. “We need to ban assault weapons and high capacity magazines,” Biden said in an evening address from the White House. But he acknowledged that Congress is unlikely to ban the weapons, adding: “We should raise the age to purchase them from 18 to 21, strengthen background checks, enact safe storage laws and red-flag laws, repeal the immunity that protects gun manufacturers from liability, address the mental health crisis deepening the trauma of gun violence.”
  • Walmart Inc. will build four new e-commerce warehouses in a push to speed deliveries, using an automated system to pick out items while also creating more than 4,000 jobs. In combination with traditional fulfillment centers, the new facilities will enable Walmart to reach 95% of the US population with next- or two-day shipping, according to a company statement Friday. That’s up from about 75% now, a company spokeswoman said. Walmart is bolstering its delivery capabilities to keep up in online sales with Amazon.com Inc. and other rivals. The new warehouses — developed with technology partner Knapp — will also ease the strain on employees by cutting a manual 12-step process for fulfilling orders to just five. That will mean less walking and lifting.
  • President Joe Biden has taken lots of heat for stoking inflation with government spending. It’s not stopping him from keeping the spigot open to fund a domestic electric vehicle supply chain. The latest sum of support was tucked into the Ukraine aid bill that Biden signed into law late last month — another $500 million to expand funds available under the Defense Production Act to obtain critical battery minerals like nickel, cobalt, lithium and graphite. That adds to the $750 million fund mining companies could access when the president invoked the Defense Production Act in March. The Ukraine bill also lifted the cap on the size of grants and expanded eligible projects to include the U.K. and Australia, as well as the US and Canada. All this builds on $7 billion in federal funding that was part of the bipartisan infrastructure bill passed last year. Those grants — which companies are now jostling for — target areas including battery manufacturing, recycling and materials processing. Biden’s use of the Defense Production Act, a Cold War-era power that President Trump also invoked to combat shortages at the outset of the pandemic, is focused further upstream, on mining and recycling.
  • Alibaba Group Holding Ltd. will replace Lazada GroupChief Executive Officer Chun Li with the head of its Thailand business and one-time business assistant to Alibaba CEO Daniel Zhang, according to people familiar with the matter. James Dong, 42, will take the reins of Lazada, Alibaba’s Southeast Asian arm, while Li will serve as adviser to Lazada Group Chairman Jiang Fan and remain on Lazada’s board of directors, the people said, asking not to be identified talking about a private matter. The leadership change comes as the battle for supremacy in Southeast Asia’s internet arena intensifies. Lazada is locked in fierce competition with Sea Ltd.’s Shopee, which has been expanding in Latin America, as well as Tokopedia, part of GoTo Group, which went publicin April.
  • Australia’s natural gas exporters are looking to cash in on domestic sales in an unusual move that highlights the extent of the nation’s energy crunch. Liquefied natural gas export projects on the east coast could opt not to chill a small amount of fuel, since spot prices in the wholesale market are higher than overseas rates, according to traders with knowledge of the matter. The LNG projects would only tap excess supply, and would continue shipments under contracts to countries including Japan and South Korea, they said. Outages at coal-fired power plants, coupled with a cold-weather snap, sent Australia’s wholesale gas prices surging this week. The Australian Energy Market Operator, which operates domestic power and gas markets, was forced to briefly impose a rarely-used price limit on wholesale gas, warning of low reserves.
  • US employers may be entering a more careful phase with respect to hiring and pay decisions. Cooler labor demand would keep narrow routes open to a soft landing for the economy, even as the Federal Reserve hikes rates in earnest at coming meetings. We estimate May data will show the smallest gain in jobs since April 2021 alongside a downshift in average hourly earnings growth. If coupled with stable or better labor supply, that mix would be a step toward the Fed’s goal of seeing labor demand cool without resorting to economy-crushing rate increases.
  • New York state lawmakers passed a bill that would trigger a two-year moratorium on new permits for certain power plants involved in Bitcoin mining. The measure, which was approved by a vote of 36 to 27 in the state Senate early Friday morning, now moves on to Governor Kathy Hochul for consideration. The state Assembly approved the bill last month.  Crypto industry groups as well as environmental conservationists have been closely monitoring the decision as lawmakers weigh the pros and cons of digital assets mining that use energy intensive proof-of-work authentication methods for cryptocurrencies like Bitcoin.

“Do what is right, not what is easy nor what is popular.” —Roy T. Bennett

*All sources from Bloomberg unless otherwise specified